County pension fund drops in May, June

In May, when the Dow Jones industrial average ended the month above 15,000 for the first time in its history, net assets held by the San Diego County pension fund slumped by $155.9 million.

The losses, which piled up at a rate of $5 million a day, were even more dramatic the following month.

San Diego County Employees Retirement Association net assets plunged by $314 million in June, culminating a two-month tailspin that combined to slice nearly half a billion dollars from the public fund.

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At the start of the current fiscal year, July 1, the county portfolio was valued at approximately $9.1 billion, the association said.

Pension officials downplayed the losses and instead pointed to yearly earnings of 8.3 percent and a 25-year track record of nearly double-digit winnings.

“SDCERA’s current investment strategy enabled the portfolio to absorb the past quarter’s loss while meeting the portfolio’s benchmark,” pension spokesman Dan Flores wrote in a prepared response to questions from U-T San Diego. “Our members can be confident with the knowledge that SDCERA’s portfolio has performed consistently well with 10-year returns of 8.7% and 25-year returns of 9.7% as of June 30, 2013.”

The reported fiscal year return of 8.3 percent is notably lower than the performance of other public pension funds in California, according to an analysis by Salient Partners, the Texas company the pension fund pays to manage its assets.

In a report to the retirement board Thursday, Salient stated that 11 other public funds reported average earnings of 12.7 percent.

More important, Salient said the San Diego County portfolio generated an “estimated return” of 6.9 percent during the year that ended June 30 and an “actual return” of 7.8 percent.

A release issued Wednesday by SDCERA touted the 8.3 percent rate of return. Flores said in a follow-up that the 7.8 percent return listed in the Salient report was preliminary. He also said the 8.3 percent return did not include fees paid by the fund.

“Gross returns are a consistent and commonly cited statistic that allows funds to compare apples-to-apples,” he wrote.

Pension officials blamed the late spring slump on comments made during a meeting of the Federal Reserve open committee in June, when government leaders laid out their thoughts about the U.S. economy.

The $470 million combined setback is significant, but it also raises questions about the investment model designed by Salient.

Even before December, when the retirement board awarded Salient a new contract worth up to $45 million over five years, trustees boasted about the “downside protection” plan to avoid sharp losses due to market fluctuations.

The idea is to insulate the fund from major drawdowns by accepting lukewarm returns during up markets.

“We’ve attempted to truly diversify the portfolio by investing in asset classes that do well in periods of high growth but also do well in periods of low growth,” Salient chief investment officer Lee Partridge said at the Board of Retirement meeting Thursday.

Trustees appeared unconcerned that 11 other public pension funds averaged close to 13 percent returns over the same year that saw San Diego County earn 8.3 percent — before fees.

“I don’t really care about comparisons,” pension board Chairman E.F. “Skip” Murphy said. “If (other public funds) make more based on their need and we make more based on our needs, so be it.”

Salient’s new contract pays the Houston consultancy 8 basis points a year, or 0.08 percent of the fund, regardless of the portfolio performance or how much employees and San Diego County pay into the fund.

Under those terms, Salient will collect about $1.82 million for the three-month period ending June 30.